The Upside of High Income Tax Rates

Basically, an income tax can be designed in a couple of ways.

1. Low rates, perhaps a flat tax, levied on a wide tax base. Few if any deductions. (Why should Uncle  Sam try to control the way you spend, invest or donate your income?) Most proponents of federal-income-tax reform lean toward this model. Realists try not to laugh.

2. High rates, made bearable by plentiful deductions. The wicked tax rates of half a century ago did not apply to interest payments, medical expenses, state and local tax payments, any purchase of goods or services that could conceivably be called a business expense, etc., etc.

The current revenue code, beloved by no one, could be termed a rag-tag compromise – "moderate" income-tax rates paired with limited deductions that sometimes phase out or vanish, depending on the level or nature of a taxpayer's income.

If a simple, low-rate, federal income tax is politically impossible, should we go back to high rates? In his Sunday New York Times op-ed, Yale economist Robert Shiller runs the idea up the flagpole.

During World War II, Shiller points out, the top income tax rate soared to 94 percent. Rates remained high after the war but did not seriously hamper the post-war boom. And people seemed to get along better back then. (Little Orphan Annie liked Daddy Warbucks). High tax rates and an ample charitable deduction eased class envy and promoted generosity, in Shiller's view.

Think we could recreate the spirit of the 1948-1963 era? In those kind and generous times, Republicans were happy to vote for a massive national infrastructure project – the interstate highway system.

The good old days
Shiller's theme, promoting philanthropy through taxation, reminded me of "Art and Taxes," an article by Jerome Rubin in the December, 1966 issue of Horizon. A sister publication of American Heritage, Horizon was hard-bound, lavishly illustrated and covered the wold of culture.

High tax rates paired with a charitable deduction don't merely encourage generosity, the article points out. They make generosity profitable. "Such titans as Morgan, Altman and Frick could afford to be generous to the nation's museums. With a proper regard for the Collector of Internal Revenue, today's wealth cannot afford not to be."

Rubin offers an example:

A gift to a museum of a Degas drawing bought before World War II for $1,000 and worth $20,000 in 1963 would have netted the 80-percent-bracket taxpayer a deduction of $20,000 and therefore a tax saving of $16,000, whereas the sale of the same drawing to another collector at a price of $20,000 would have resulted in a capital gain tax of $4,750 and cash in hand of only $15,250. (These figures reflect Federal taxes only; state income taxes would also have taken their toll, thus making the charitable gift still more attractive.) Clearly, under these circumstances it is more rewarding to give than to sell; in responding to his sense of altruism and high purpose, the astute collector has been able to benefit not only his soul but his bank account.

An editors' note sums up: 

[T]he phenomenal growth of public art collections in this country has corresponded very closely with the imposition of certain taxes over the past generation or so. The point might be made that during these years the government, through such measures, has been – indirectly, somewhat unwittingly, but in effect – a lavish patron of the arts. There is some irony here since this is a role which, in any more direct form, our Federal government has…been very reluctant to assume.

Robert Shiller, we should note, does not advocate income tax rates quite as high as 80 percent. He does point out that the 94-percent tax rate of WWII was imposed only on incomes above $2.6 million in today's dollars. 

If President Obama really wants to tax the rich, perhaps he should raise the rates on joint-return incomes over $2.5 million, not $250,000.

Horizon's article is illustrated with David Levine's drawings. This one targets a tax gimmick that remained popular until 2006 legislation made donations of fractional interests unattractive. 

Related post: Why High Income Tax Rates Didn't Matter